Top 8 Questions to Ask Your International Tax Advisor about Buying Property in Australia
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Foreign property investors account for only 3.7% of new home sales and 2.2% of established dwellings. Most expats and foreign buyers don’t realise the potential tax benefits and other financial rewards of investment property in Australia.
Yet, as with all financial decisions, you shouldn’t take property investment lightly. To help you make the most of your investment, we’ve compiled the top ten questions you should ask your tax advisor.
Why Invest in Property in Australia?
Australia’s housing market is one of the most prosperous globally. Residential property prices in Australia have gone up more than 20% in the last year. Comparatively, Singapore’s property market has increased by 10.6%; Hong Kong’s house prices only increased 3.6% year on year. It’s clear that Australia’s booming housing market is a substantial investment opportunity.
- Stability: Two-thirds of Australian households are owned by owner-occupiers, meaning there is relatively little speculation. Moreover, Australia’s most popular cities have a constant undersupply of housing. As a result, your investment property will see strong capital growth and rental returns.
- Consistent growth performance: The recent dramatic boom in house prices aside, Australian properties are known to double roughly every ten years. And, even the recent steep increase in house prices shouldn’t harm capital growth as experts still predict prices to increase in the next few years.
- It’s easy to invest in Australia: While most countries have strict lending policies for overseas applicants, expats can easily invest in Australian property. You don’t need to apply to FIRB – although you may need a mortgage broker’s help to secure a home loan with foreign currency.
Tax benefits: Australian tax rates are some of the highest in the world. Fortunately, expenses on a rental property are tax-deductible. Therefore, property investors can reduce their taxable income.
Get a free Australian mortgage assessment today.
What to Consider When Buying an Investment Property?
Any investment is a risky business. There is always a chance that your investment might not result in solid returns. Fortunately, Australia’s housing market is relatively reliable. That said, you should still take these considerations into account before pooling your money into rental properties.
- Location: Ensure you research the best area to purchase your investment property. While Sydney in New South Wales might have record-high prices and strong capital growth potential, is it the best location for tax purposes? Consider which Australian states have the lowest property taxes with the highest capital gain potential.
- Deposit: Most lenders require a minimum 20% deposit. Otherwise, you must pay Lenders Mortgage Insurance, a significant financial burden affecting your returns. Moreover, consider whether you can get a better interest rate with a bigger deposit.
- Expenses: With most investments, you might pay account management fees but, otherwise, face few costs. However, property investment is different. You need to pay for upkeep, property management, maintenance, tenant advertising, legal fees, and mortgage expenses. Factor these into your investment budget and ensure the rental income will cover it.
Fortunately, most property-related expenses are tax-deductible.
How Do Australian Taxes Work?
The Australian tax system is actually very straightforward. Using marginal rates, each taxpayer has to pay a percentage of their net income for the financial year (including capital gains) to the Australian Taxation Office.
To determine how much tax you will pay that year, you must complete a tax return. An expert can offer professional advice and help you deduct expenses from your taxable income.
On top of income and capital gains tax, you might have to pay stamp duty and land tax on your property investment. There are a few exceptions – properties under a specific price and first-time buyers are often exempt. It’s worth calculating your tax obligations before purchasing a property to factor into your budget.
How Does an Investment Property Give You Tax Back?
One of the best ways to ensure financial returns on your property investment is to take advantage of tax deductions. A tax deduction is an expense you can offset against your taxable income. Potential tax deductions for investment properties you should include on their tax return:
- Interest payments on your home loan
- Loan establishment fees
- Other borrowing costs
- Depreciation of property value
- Cost of property managers
- Maintenance costs
- Land tax
- Water and council rates
- Landlord insurance
- Capital improvements on the property
Get a free Australian mortgage assessment today.
8 Questions to Ask Your Tax Advisor About Your Australian Property Investment
To avoid paying huge expenses towards tax, ask your advisor these ten questions about your Australian investment property.
1. Am I a Tax Resident in Australia?
Firstly, you should establish your tax residency status in Australia. If you live abroad, you have likely ceased residency in Australia. If you remain a tax resident, you must pay Australian taxes on your worldwide income. Therefore, if you live and earn in Hong Kong, you must pay tax towards ATO on your Hong Kong income and Australian income.
Adding rental income to your salary and overseas property income may push you into the next tax bracket.
To ascertain your tax residency status, the Australian Taxation Office has four tests:
- The Resides Test
- The Domicile Test
- The 183-day test
- The Commonwealth superannuation test
Under the current rules, it’s easy for expats to prove they are not tax residents in Australia. However, the ATO is considering introducing new rules that make it harder to cease residency. Ask your tax agent how your tax residency status affects your property purchase.
2. How Do I Cease Tax Residency in Australia?
If you are a tax resident of Australia but live abroad, it may be in your best interests to cease residency. A tax advisor should tell you whether you qualify to terminate your residency. There are currently no hard and fast rules about being a tax resident. However, the general rule is that if you live and work in Australia for six months or more, you are a tax resident.
Tax residents must pay tax on their worldwide income. A non-resident must only pay taxes on their Australian sourced income. That said, non-residents pay higher tax rates and do not receive a tax-free threshold. Discuss whether ceasing your tax residency is the right decision with your tax agent.
3. Does Australia Have a Tax Treaty With My New Country?
If you are a tax resident of Australia, you may face double taxation on your rental property income. This means that you pay taxes on your income in Australia and your new country. Fortunately, Australia has tax treaties with more than forty other countries. Therefore, when you complete your tax returns, the country with the least claim to your taxes will offer a refund.
Ask your tax advisor whether your new country has a tax treaty and how to lodge a credit claim.
4. Do I Have to Pay Land Tax on My Investment Property?
Land tax is based on the value of the land. It doesn’t include any buildings or properties on the ground.
Rules differ between states. Most states have a minimum threshold – for example, in Western Australia, the land value must be above $300,000 before you start paying tax. In South Australia, the threshold is $482,000. The Northern Territory is the only state where you don’t have to pay land tax on any purchase.
For the most part, land taxes are an annual cost. However, in the Australian Capital Territory, a property investor pays quarterly. Land tax is tax-deductible, but you should still factor it into your property investment.
If you buy a property jointly with a foreign resident (i.e., a spouse), you might have to pay a foreign ownership surcharge.
5. Do I Have to Pay Stamp Duty on My Investment Property?
Stamp duty is a one-off tax you pay when you purchase a property. Stamp duty is usually around 4 – 5% of the purchase price. First-time buyers and properties below a certain price ($800,000 in NSW) are sometimes exempt – however, these exemptions vary depending on the state.
Additionally, foreign buyers and those purchasing jointly with a foreign resident must pay a surcharge in most states. The NT and ACT are the only states where the foreign buyer surcharge does not apply. Ask your tax advisor about your stamp duty obligations.
Get a free Australian mortgage assessment today.
6. When Do I Pay Capital Gains Tax CGT?
Property investors pay capital gains tax when selling their houses. If you live at your property for more than 12 months, you can claim a CGT exemption. However, as non-residents for tax purposes and living away from Australia, most expats cannot take advantage of this.
CGT is not a separate tax from your income tax, despite common belief. Instead, you must add the sum to your net income at tax time when you make a capital gain. The ATO charges you the income tax rate for your total earnings for the tax year.
As a foreign resident or expat, the only way to avoid CGT is to reduce your taxable income. Ensure you take advantage of any tax deduction you can when investing in property.
7. Does Foreign Resident Capital Gains Withholding (FRCGW) Affect Me?
Purchasing a property investment comes with many additional taxes and other expenses. The final tax to watch out for affects you whether you buy or sell a home valued at $750,000 or more. The Foreign Residents Capital Gains Withholding tax is ATO’s way of ensuring foreign residents pay capital gains tax.
When you purchase a house in Australia, check whether the vendor is a foreign resident. If they are not, they will have a clearance certificate, and you can proceed with the purchase as usual. If they are a foreign seller, you – as the purchaser – will need to withhold 12.5% of the purchase price for ATO if the property is worth $750,000 or more.
The vendor can claim the withheld sum on their tax return. As an expat, you won’t be able to supply a clearance certificate when selling your investment property. Therefore, your buyer will withhold 12.5%, and you will have to claim it back on your return.
8. How Do Tax Deductions Work?
The best way to reduce tax payments is to deduct all your allowable expenses. For example, at the end of the tax year, Angie has earned $32,000 in rent. She adds up her home loan interest payments, property management fees, and maintenance costs. Angie’s total rental property costs add up to $25,000.
Therefore, her total taxable income is $7,000. As an expat, she is a non-resident for tax purposes. Therefore, Angie does not qualify for the free-tax threshold. Her total tax payments equal $2,275. If she had not deducted her expenses, Angie would have to pay $10,400.
Completing an Australian Tax Return While Overseas
It’s relatively straightforward to complete your return from overseas. Before moving abroad, you may have to set up your account to allow overseas tax payments. If you don’t have a Tax File Number, you will need to register for one with ATO. To lodge your tax return, log into your account and detail your income and expenses for the tax year by October 31st.
Get a free Australian mortgage assessment today.
Tax Advice: Buying Property in Australia
Just as you must speak to mortgage brokers and conveyancers about your financial situation when buying property investment, you should also consult a tax advisor. As an expat living abroad, you may face additional foreign surcharges if you’re not careful.
Bottom Line
Buying an investment property is a financially sound decision. However, as with all investments, you need to research the potential expenses and tax costs. Your home loan is just one expense of buying a house – make sure you budget for taxes too.
Frequently Asked Questions
Does Buying a House Affect Tax Return Australia?
When you buy a house, you need to detail your rental income and property expenses on your tax return. If you make a capital loss on your investment property, you can offset it against your other taxable income.
How Much Tax Do You Pay When You Buy a House in Australia?
Purchasing property comes with many hidden expenses. When buying a house, consider land tax, stamp duty, and Foreign Residents Capital Gains Withholding tax. You will likely need to pay capital gains tax when you sell a property. Foreign buyers may face surcharges.
Is Property Advice Tax Deductible?
Suppose you seek professional advice from a tax agent or other property experts. You can deduct their services from your taxable income if it is directly related to earning an income. Deducting expenses is the best way to reduce your tax payments and save money on your investment property.
How Do I Avoid Capital Gains Tax on Investment Property in Australia?
If you’re a tax resident and live in a property for 12 months or more, you may qualify for the CGT main residence exemption. However, if you’re an expat or own an investment property, the only way to reduce your CGT is to deduct property-related expenses from your taxable income.
What Tax Questions Should I Ask When Buying a Property?
When you purchase a property in Australia, you should consult a tax agent about the potential tax payments you need to make. You should ask a professional about whether you’re a tax resident, whether you need to pay stamp duty and land tax, and how to reduce your tax bill most efficiently.
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